House-flipping waiver is extended

Federal officials have extended a regulatory waiver that makes it easier to "flip" properties — a move meant to encourage the renovation of foreclosed homes but that critics say could herald the return of predatory schemes.

The Federal Housing Administration has waived through 2014 an anti-flipping regulation, which had prevented the agency from insuring mortgages on properties sold within 90 days of acquisition. The waiver, first implemented in 2010 to bolster the flagging housing market, is intended to enable investors to buy and quickly rehab properties as the market continues to struggle.

But in Baltimore, one of the cities most affected by fraudulent flipping, some housing experts are concerned that another extension of the waiver may usher in a repeat of predatory transactions that duped hundreds of buyers in the late 1990s and early 2000s, and left many Baltimore neighborhoods scarred with abandoned homes.

The anti-flipping waiver has been controversial even within the Department of Housing and Urban Development, which oversees the FHA. Kenneth M. Donohue, HUD's inspector general at the time, raised concerns about the waiver and its implications soon after it was instituted.

"While we recognize FHA's business decision to again institute its anti-flipping waiver as a way to encourage investment, stimulate the housing market, and reduce blight through home ownership, we continue to have concerns that the anti-flipping waiver will also invite fraud schemes to occur," the inspector general's office said in a statement last week.

The inspector general's office added that officials continue to devote resources to investigating flipping schemes "wherever they may arise."

"We're getting ready to go right back into the mess we just had," said Larry Chriscoe, who says he was the victim of a flipping scam in 1999.

Chriscoe used an FHA-backed mortgage to buy a house in the Waltherson neighborhood of Northeast Baltimore. He said the seller had owned the home for a short time and used cosmetic improvements, such as paint and caulk, and a deceptive appraisal to charge him tens of thousands of dollars more than the home was worth.

"I walked out on the property," said Chriscoe, who decided it wasn't feasible — or logical — to pay off a mortgage that cost much more than the value of his home, which needed major roof repairs and an electrical overhaul. "There were so many things wrong in that house."

Flipping schemes proliferated throughout Baltimore and targeted first-time and lower-income buyers. In some areas, groups of homes were bought cheaply by speculators, revalued by conspiring appraisers and resold within days — or hours — for many times over the seller's purchase price.

In the 1500 block of N. Bethel St. in the Oliver neighborhood of East Baltimore, for instance, one unscrupulous investor purchased six rowhouses in 1997 for less than $6,000 apiece. He resold them the same day for nearly $50,000 each to unsuspecting buyers, according to tax records and Sun reports. They were subsequently purchased by the city and demolished.

Like Chriscoe, many buyers walked away from their homes and left behind vacant properties to be dealt with by banks, City Hall and the federal government. The transactions also destroyed buyers' finances. Chriscoe filed for bankruptcy and said he is still trying to get his credit in order, eight years after leaving his flipped home.

In 2003, after flipping had been a growing problem in Baltimore for the better part of a decade, prompting Sen. Barbara A. Mikulski and others to hold hearings in the city about the practice, HUD issued the anti-flipping rule that restricted what mortgages FHA would insure. " 'Quick flips' will be eliminated," the FHA said in a statement at the time.

But after the housing bubble burst and foreclosed homes became commonplace, the FHA decided to lift the ban to accelerate the resale of homes.

At the time, Donohue said the action had not been vetted with his department. "While we understand the underlying reasoning to turn around foreclosed properties in a quicker manner, we believe its imposition may open a new round of fraud-related flipping abuse," he said in written comments to a congressional committee.

Donohue said the FHA should be wary of loosening regulations because the government, to encourage lending, has insured more mortgages. In each of its two most recent fiscal years, the FHA insured 1.2 million loans — well over $200 billion worth of mortgages each year.

More FHA loans can make "careful and comprehensive lender monitoring difficult," Donohue wrote in his comments. He noted that in previous periods of high volumes of FHA loans, "the program was vulnerable to exploitation by fraud schemes, most notoriously flipping activities, that undercut the integrity of the program."

The waiver has been extended twice before, in single-year increments. The second extension was set to expire Dec. 31, but in November HUD announced it was again extending the waiver — this time for two years, until Dec. 31, 2014.

"FHA research finds that in today's market, acquiring, rehabilitating and reselling these properties to prospective homeowners often take less than 90 days," HUD said in a statement in December 2011, announcing the second extension.

To some, the extensions make sense as a way to keep the housing market moving forward.

"It's a different market now," said Andre Weitzman, a Baltimore attorney who represented many homeowners victimized by flipping fraud schemes. "The main catalyst for flipping was the easy availability of loans. Money's not so easily available now."

As long as lenders are more stringent in their mortgage requirements, there seems to be little room for inflated home values to be used as a way to get a quick-flip payout, he said.

Appraisers, too, are being more careful now than they were during the housing bubble, said Fern Dannis, the director of housing programs for the Maryland Association of Realtors. When the market was hot, appraisers were more likely to be taken in by the constantly rising values, instead of focusing on the value added only by improvements.

Restrictions built into the waiver should also guard against fraud, said Owen Jarvis, an attorney at St. Ambrose Housing Aid Center, which helped lead efforts against flipping in Baltimore.

For instance, to be eligible for the waiver, a property that is being sold for more than 20 percent more than the seller's acquisition cost must provide a second appraisal or provide documentation of the improvements to the home. An inspection also must be completed if the home is being resold with 90 days for a price that is 20 percent more than its previous sales price, according to HUD.

"As long as that's adhered to, that seems to protect the buyer," Jarvis said, though he added that if no one is monitoring loans to ensure those precautions are taken, there could be a problem.

Mortgage fraud has again become a problem in Baltimore in recent years, as residents facing foreclosure or "underwater" mortgages, in which they owe more than the home's value, seek assistance.

Against that backdrop, Mark Sissman, president of Healthy Neighborhoods Inc., said he's also concerned about the anti-flipping waiver. His organization, which promotes homeownership and stabilizing Baltimore neighborhoods, still sees wide swings in appraised value of homes, he said. And loosening regulations could invite more mortgage fraud, he said.

"Somehow, in Baltimore, creative entrepreneurs have found every way possible to make money at the cost of individual homeowners and the FHA," he said.

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